Tate & Lyle PLC
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Tate & Lyle PLC
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Hello, and welcome to the Tate & Lyle Trading Statement Call. My name is Rosie, and I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]I will now hand you over to Nick Hampton, Chief Executive, to begin today's conference. Thank you.
Thank you, operator. Good morning, everyone, and welcome to the conference call. With me is Imran Nawaz, our Chief Financial Officer. Before Imran and I take your questions, I'd like to make some introductory comments. We continue to make good progress on our near-term priorities: to look after our colleagues and communities, strengthen our relationships with customers, continue to progress our strategy and maintain our financial strength. This focus led to a particularly strong third quarter performance with good top line growth, supported by excellent operational execution and cost discipline. I remain pleased with the continued momentum, growth and strategic progress in Food & Beverage Solutions, building on the investments and enhanced capabilities we have put in place over the last 3 years. Revenue increased by 8%, with North America performing particularly well, delivering double-digit revenue growth from strong demand for products consumed in-home and by winning new business across our main categories. We continue to make good progress delivering on our strategy. We announced 2 acquisitions in the quarter, adding tapioca and stevia capabilities to strengthen our texturant and sweetener portfolios. Our innovation and customer pipelines remain healthy, supported by closer relationships we have built with our customers to drive growth. In Sucralose, volume was slightly higher, helped by the phasing of some customer orders into the third quarter, with revenue lower due to customer mix and pricing pressure. The supply-and-demand balance of the industry continues to be impacted by lower out-of-home consumption, particularly in beverages and excess capacity in China. Primary Products performed solidly, benefiting from a strong focus on customer service and operational agility. Performance was supported by commodities, where exceptionally strong core product recoveries led to profit ahead of the comparative period. The 2021 calendar year bulk sweetener pricing round is nearing completion, with slight unit margin compression that we expect to mitigate with our ongoing productivity program. Turning now to the outlook for the 2021 financial year. Despite the impact of COVID-19, group adjusted profit before tax in constant currency is expected to be modestly ahead of the prior year, benefiting from continued momentum in Food & Beverage Solutions, cost discipline and significantly higher year-on-year commodities profits. This assumes there aren't further lockdowns in North America in February and March, which materially impacts current levels of out-of-home consumption. So while the operating environment remains uncertain, the business continues to show great resilience and agility, with strong operational execution, customer service and connectivity and cost discipline. We are successfully progressing our strategy. And as the world emerges from the pandemic, our portfolio and capabilities are well placed to meet increasing demand from consumers, customers and governments for healthier and tastier food and drink. Overall, I'm pleased with the progress we are making to unlock the growth potential of our business, and we remain focused on delivering our near-term priorities. And with that, Imran and I will open up the call for questions. Back to you, operator.
[Operator Instructions] And our first question comes from the line of Mirco Badocco from Bank of America.
Yes. I've got 2 questions, please. First one is on Food & Beverage Solutions. Now you had a very strong performance overall, and especially in North America where you flagged double-digit growth in the quarter. So I guess can you give us a bit more color on why FBS has been so strong in the quarter, especially in North America? Now is there anything to flag in terms of customers, buying patterns or phasing, for example? And the second question is on commodities. You had now clearly an exceptional performance, helped the comp prices, so how should we think about this quarter and for the rest of the year or in the next quarter? Is it sensible to assume H1, for example, to be similar to H2?
Mirco, thank you. Let me take the first question on FBS and then maybe, Imran, you could cover commodities. So I mean really, the strength of performance in quarter 3 is a reflection of the continued progress we're making with customers on successfully growing their businesses. The relationships we developed are clearly starting to come through significantly. So 8% in the quarter. Revenue growth is very strong. Following 2 years at 5% growth. So it's a step-up and clearly, a step-up from half 1. I mean what we're seeing in North America is a combination, really, of 3 things. Firstly, very strong in-home consumption, benefiting sales into retail, where we've got some strength through our big customer relationships. Secondly, an improvement in out-of-home consumption, although still behind last year. But significantly, the third thing is we're continuing to win new business because of the strength of our innovation pipeline. So in the quarter, we saw new product revenues growing double digit, which again is ahead of the first half. So our innovation program is really working. And then outside North America, we saw improvements as lockdowns eased across Europe. And significantly, Asia is opening up. So we saw a strong performance in China. So it's really a reflection of the continued focus on our strategy on Food & Beverage Solutions and improving market dynamics, albeit the out-of-home is still softer than last year. Imran, why don't you take the commodities question?
Sure. As you point out, the first half, we delivered a very strong commodities result. It was around GBP 16 million, and that was supported by the high corn oil price. The way to think about it is quarter 3 continued to show that same strength, driven by the same drivers. So when I look at this full year on the commodities, I would assume that the second half is at least as strong as the first half. The team has really done an excellent job. And clearly, as we point out in the outlook, commodities will have a very strong year.
The next question comes from the line of James Targett from Berenberg.
A couple of questions from me. Just on -- coming back on to FBS, you saw a big improvement in your kind of, I guess, your price/mix or the value component of your growth in Q3. I think it was only -- I think it was in the first half of the year. So could you talk about kind of how -- if it's -- that's driven by mix or pricing? And if you think that's a good sort of run rate going forward? And then on the Latin America and Asia Pacific, you're -- again, you're sort of seeing good acceleration of volumes from what you're doing in -- or growth in what you're doing in Q2. Can you talk about how broad-based that growth was? And if you're still seeing some challenges in some markets you highlighted in the second quarter?
Sure, James. Thanks for the question. I mean as you rightly say, volume-to-price leverage is very strong in the quarter, so 3 points. That's 2 points better than the first half. I mean I think it reflects a couple of things, really. Firstly, the strength of growth in the new product portfolio. So as I said, we saw double-digit growth in new product revenues. Obviously, we want to see an improvement in mix. And secondly, some new business wins to help drive growth. I wouldn't say that 3 points leverage is the right way to think about the business going forward. It's probably at the upper end of where you'd expect to be. But we clearly want to see continued progress there, and Imran, might add some color to that. I don't know, Imran, have you got anything to add?
Yes. I mean when you look at the last 2 years, we've closed on FBS, we have seen that mix specifically has been a strong driver of that leveraging up, right, between revenue and volume. And that mix is driven by the fact that most of the innovation -- or all the innovation that we launch in fibers, in the stevia soar, in the clean-label texturants, come at a higher revenue per kilo. I would say, on the long term, algorithm-wise, volume-to-revenue, I'd see 1 to 2 points as sort of the number we would like to continue to see. It was stronger this quarter, which is great. That was driven by the new product innovation and the strong performance in North America.
So then if I come back to your second question on what we're seeing around the world, as the pandemic continues to evolve. I mean clearly, in North America, we saw retail performance and strength more than offsetting out-of-home weakness with out-of-home consumption improving as well. In Europe, it was probably more muted, the 2 more offset each other. I mean in general, lockdowns in Europe are more severe, currently. Then if you go to Latin America, I call out very strong performance in Brazil despite the pandemic, and that's a reflection actually of the progress the business is making. More challenging in Mexico still. And then when you look at Asia, China clearly has emerged from the pandemic, more or less, and we're seeing good growth. We're seeing progress across the majority of Asia. There are some hotspots. So not surprisingly, Japan is more challenging because there's a very severe lockdown in Japan at the moment that is impacting out-of-home consumption, especially beverages. So it's a mixed picture, but net-net, overall improvement versus the first half.
The next question comes from the line of John Ennis from Goldman Sachs.
I have a few questions on higher corn costs and pricing for FBS. I just wondered, how long would it be before you have to start pushing through price increases for the FBS business, given what we've seen in corn prices? And related to that, how far forward do you tend to hedge corn for that part of your portfolio? And then my second question, again, related to this is, when we look at the very, very strong volume growth in FBS this quarter, is there an element of customers buying in ahead of an anticipated price increase? Can you maybe comment on that? I appreciate it's always hard to be able to decide for these things, but interested to hear your views.
Let me take the second question first, John, because I think that's the easiest one to answer, and I'll let Imran take the corn price question. I don't think there's any signs of customers buying ahead of any price increase. I think what we did see a little bit of benefit from in the third quarter is a lot of our big customers ran hard through the Christmas period to keep retail supply strong. And I suspect there was a little bit of phasing into the quarter driven by that. Difficult to tell how much. We'll have a clear view, I think, when we get through January and February. So it's more about supply-demand mechanics into the market -- or the dynamics into the market than it is about buying ahead of price increases. We probably saw a little bit of that, especially in North America, but not driven by pricing. Imran, I don't know, can you take the corn cost one?
Yes, of course. As you point out, corn has gone up over the summer from around $3.25 a dollar to $5.25 a bushel. So that -- we have seen that inflation kick in. Pricing in FBS is a bustle that the businesses has been developing over the last few years. And clearly, we don't just price for corn, but we try to also price for value. And the way I think about corn is in North America, we hedge the corn as we contract. So you take the risk off the table of -- and therefore, you're in a very strong place that way. In emerging market, we price regularly in the emerging markets simply because you also have corn, but you also have ForEx and other reasons to price. So that happens throughout the year. And then again, in Europe, very similar to -- actually growth markets, we will price for the value and where we can for the corn as well as the -- as time elapses. And we'll keep you posted on that. When we think of margin management, we clearly think of pricing for corn, but we also think on productivities and we think of driving the mix.
Next question comes from the line of Alex Sloane from Barclays.
A couple of questions, please. Just firstly, on the HFCS pricing round, you say you're kind of substantially through that. And where there'll be slight unit margin compression, you expect to offset with productivity gains. I wonder if you could maybe kind of give any sort of quantification on the scale of productivity cost savings that might be required to do that.And more broadly on the contracting round, kind of thinking longer term, I mean, your sustainability team gave a very comprehensive presentation at the science-based target seminar back in December, again, highlighting the Truterra partnership that you have in the U.S. is actually being the largest regenerative agriculture program there. I mean to what extent, if any, does that help as the kind of differentiating competitive advantage to peers, as you go through these pricing rounds? And if not now, do you expect it to in time?
Look, that's a great question. And look, we're very proud of the focus and progress we're making on sustainability. As you say, it's the biggest program of its kind, and it covers all of the corn that we buy globally every year. And there is no doubt, given the increased focus on sustainability and the role that big business needs to play in arresting climate change, that it will become a point of differentiation for us as we continue to develop customer relationships on the primary product side. I mean it's another good example of doing the right things to help build the business for the future. It will no doubt be a benefit to us over time. Increasingly, we're talking to customers about the importance of sustainability, right, the way through the supply chain. And it's an increasing component of our focus going forward, and I think reflects how well the team is done through the last pricing round. Imran, I don't know if you want to take the question on productivity.
Yes, absolutely. So when we step back, the productivity program that we had announced a few -- a couple of years ago now was to go for $100 million over 4 years. And as you know, we extended that to $160 million over 6 years. At the end of last year, we have delivered $87 million. In the first half of this year, we announced another $8 million. That run rate is continuing on the specific productivity program. And truthfully, everything is on track to continue and get its fair share to go from where we are now to the remaining $150 million that we want to, to deliver the $150 million that we would like to get to. And I think we're on track. And the way I think about it is the reason for the creation of the productivity program and the mindset and the culture that we've created is exactly for moments like this where it's very helpful to offset any sort of slippage you might have on the pricing round.
The next question comes from the line of Martin Deboo from Jefferies.
Martin Deboo from Jefferies. I'm going to stick with the grungy stuff, if you don't mind. Just on Primary, price/mix was exceptionally strong in Primary. How should we think about that? I wasn't aware there was too much direct pricing. So are you getting a better mix in that part of the business? And what's the implication for the bottom line? And then just very quickly, how did the JVs do during the period? And why is the tax rate coming down so much? I mean it sort of implies -- the tax guidance implies something like a 10% tax rate in H2. So can I just understand that? Okay.
So let me take the tax rate one. I think I wrote down all your questions, but let me try and follow, you may need to remind me if there was one I missed. On the tax -- Okay. Great. On the tax rate, you'll remember at the first half, we reported a rate of around 16.5%, and that was lower than our normal run rate because we had a provision for a tax liability that did not materialize. As we close quarter 3, we have some, I'd say, additional favorable closings of some historical tax positions that were held in the U.S. and as we release those related provisions that benefits us in the year. So clearly, the tax rate will be lower. Maybe the question you didn't ask, but probably is going to come next on the tax rate is a normalized year and as we look into next year as well. I mean the way I think about it is the U.S. rate, the federal rate of 21, the state of 4, and the U.K. rate at 19, tells you that the normal run rate for the long-term for this business on the tax rate side should be between 19 and 22. So again, to summarize, this year, exceptionally low. Provision releases due to old tax positions are the main driver ongoing, think of it more as 19 to 22. When I take your question on Primary Products, the reason when you look at 4% volume and 9% revenue on a reported basis, that reflects the fact that the core product values and commodities have risen. To demonstrate to you what that number looks like, excluding commodities, what you see is volumes are up 3% and revenue is down 2%. So that takes away that core product elements, and it's sort of more the pure, if you were to refer to it as core Primary Products. And that difference between the volume and revenue, that decline that you see, is really just the pass-through of lower net corn costs. I think you had a third question?
Yes, yes. Just the last one is you just -- how are the JVs doing during Q3?
Look, I think as you remember, the JVs had a solid first half. I think quarter 3 was also relatively solid. I think there was a slight weakness in Mexico that Nick was referring to earlier, but by and large, okay.
We have no further questions coming through. So Nick, I will hand the call back to you for any closing remarks.
Thank you, operator, and thank you, everybody, for joining the call and for your questions. In summary, this was a strong quarter performance, with the business demonstrating exceptional resilience and agility. Food & Beverage Solutions continues to deliver robust growth, and the group is well placed to emerge from this period an even stronger business. Finally, last week, we were delighted to announce the appointment of Vivid Sehgal as our new Chief Financial Officer from the 1st of May. I wish Imran every success in his new role at Tesco, and Vivid and I look forward to speaking with you on the 27th of May at our full year results presentation. Thank you, everyone, and thank you, operator. Have a good day, and please stay safe.
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